New calculation makes China 3rd biggest economy

May 20, 1993|By New York Times News Service

WASHINGTON -- Saying that traditional measure underestimate the economies in developing countries, the International Monetary Fund has concluded that China's economy is more than four times bigger than previously measured. That makes it the third largest, behind the United States and Japan.

In a study to be released next week, the IMF also greatly increases estimates of the economies of India, Indonesia, Mexico, Brazil and other developing countries.

Until now, most studies have measured each country's output by valuing its goods and services in dollars, using international exchange rates. Thus, if China's currency weakened, its economy appeared to shrink.

But in the new method, national output is calculated by what goods and services a country's currency will buy compared to the purchasing power of other countries' currencies.

By this method, the IMF found, China produced about $1.7 trillion in goods and services last year, far greater than most previous estimates of about $400 billion.

The recalculation means that China's economy, one of the fastest growing in the world, is just slightly smaller than Japan's -- and not No. 10, as previously calculated. It is less than half the size of the U.S. economy.

Many economists say the new calculation is long overdue and gives a much more accurate picture of the developing world's economy. The study could have repercussions in international aid programs, where per-capita income is crucial in determining assistance.

If China's prodigious growth continues, the World Bank said, the combined economies of China, Hong Kong and Taiwan will be larger than the United States economy in less than a decade.

"The main importance of this is geopolitical," said Paul Krugman, an economist at the Massachusetts Institute of Technology. "It's a reminder that China is a great power already, which is something many people haven't quite grasped yet."

The new estimates, many economists say, will push policy-makers to stop thinking of the world economy as having just three poles -- the United States, Europe and Japan -- and encourage them to add a fourth: China.

"You have over a billion people there, and even with per-capita income that's pretty modest you have a pretty big overall economy and a growing market for imports," said C. Fred Bergsten, director of the Institute for International Economics.

IMF officials said they would now rely mostly on purchasing-power parity in measuring economies, but they added that they would not abandon use of exchange-rate measures.

Using the fund's new measure, per-capita income in China was about $1,600 last year, compared with $370 using estimates based on exchange rates. Per-capita income in the United States last year was $22,204, based on purchasing-power parity.

Using this measure, India's economy soars to $996 billion, the sixth largest, from $285 billion using exchange rates. India's per-capita income jumps to $1,150 a year, from $330.

World Bank economists apply the purchasing-power parity somewhat differently, and as a result their estimate of China's total output is even higher than reckoned by IMF. The bank puts the figure at $2.2 trillion in 1990. If one adds China's growth of 10 percent a year over the last two years, its 1992 output reached $2.6 trillion, making it larger than Japan's.

Officials from some developing countries object to using purchasing-power parity because of World Bank rules state that countries with annual per-capita income of more than $765 cannot qualify for loans under the most favorable terms, usually 35 years with no interest.